Flight of The Millionaires: Reasons to Give Thanks For The One Percent

Who Wants to Be a Millionaire? (Philippine game show) (Photo credit: Wikipedia)

The Congressional Budget Office (CBO) released its latest tax data this month. The report details who contributed how much to federal revenues in 2009. The figures raise the question: why do so many in this country seem so eager to berate the ‘one percent’ rather than thank them for their extraordinary contributions to federal coffers?

According to the report, those in the top one percent had an average pre-tax income of $1,219,700 in 2009. Of this, they paid $353,000 federal taxes. Despite having earned 13.4 percent of the nation’s income, these individuals paid 38.7 percent of federal income taxes that year. To put it more starkly, this group makes less than 16 times as much as the average household but pays more than 40 times as much in federal income taxes.

Sure, the picture looks a little different when all federal taxes are included. With payroll, corporate, and excise taxes thrown into the mix, the top one percent contribute “only” 22.3 percent of all federal taxes. But in raw dollar terms, the average one percent household pays 23 times as much in total federal taxes as the average household—a difference of $337,700. Despite this, some politicians and activists claim with a straight face that our country’s top earners don’t pay their “fair share.”

Consider a world without such individuals—a world in which we have so taxed and vilified the most prosperous Americans that they all elect to follow Denise Rich and foreswear their U.S. citizenship in search of greater economic freedom. French President François Hollande is already learning this the hard way, as many of his country’s wealthiest individuals pack up and leave as a result of his proposed tax hike on French millionaires. Indeed, the U.S. itself has seen an eightfold increase in the number of Americans abandoning their citizenship (most, apparently for tax-related reasons). Since U.S. lawmakers have yet to show any ability to curtailing their spending, Uncle Sam would be looking to the remaining 99 percent of taxpayers to make up what would be a massive gap in income tax revenues due to the sudden emigration of the top one percent.

As a matter of simple arithmetic, everyone’s federal income taxes would have to go up by at least 63 percent to compensate for this lost revenue should the top earners depart. Such a gargantuan increase in taxes would rather substantially reduce work effort among the remaining 99 percent. The best evidence suggests that the economy loses 52 cents in output (lost work effort) for every dollar increase in individual income taxes. That means Congress would need to nearly double the rates for everyone else in order to cover the revenue gap.

Moreover, there’s a major discrepancy between the one percent’s financial support of government and its consumption of the resulting services.

If our population lost the top one percent, government could theoretically shrink spending on defense, courts, etc. by one percent to account for reduced need for services. However, since most federal payments for individuals are means-tested (ie. entitlement programs such as Medicaid and food stamps), loss of America’s top earners wouldn’t translate to a proportional reduction in these areas of the budget. And those payments accounted for more than 60 percent of federal spending in 2010.

Of course, losing the top one percent would mean far more than the loss of hundreds of billions in tax revenue. According to Federal Reserve data, this group also accounts for 30 percent of philanthropic giving. Many in the top one percent are business owners who employ many workers. In fact, nearly two thirds of those making over half a million dollars a year personally bear the risks of owning a company on their own or with just a few other shareholders. And losing the top one percent would translate to the departure of nearly 200,000 physicians—something a nation facing a doctor shortage could ill afford.

Like most Americans, I do not expect to enter the ranks of the top one percent (which in 2009 included one-person households with incomes exceeding $282,900, two-person households above $400,100, etc.). Perhaps I am totally deluded, lacking in class consciousness, or simply a victim of the Stockholm syndrome. But the way I look at it, I’m eminently grateful for those who have worked to attain this lofty status. I wish the current political elite felt the same way.